Monday, August 13, 2012

By
decision dated August 9, 2012, the Supreme Court of California handed down its
long-anticipated holding in State of
California v. Continental Insurance Company, 2012 Cal. LEXIS 7324, a ruling
that now further defines California law concerning trigger of coverage,
allocation of loss, and stacking of policy limits in matters involving
continuous or progressive loss.

The State of California decision relates to
insurance coverage for environmental contamination emanating from the
Stringfellow Acid Pits waste site, which had been operated by the State from
1956 through 1972.The insurance
coverage dispute involved the State’s right to coverage under excess general liability
policies issued during the period 1964 to 1976.The State estimated site remediation costs could reach $700
million.Each of the State’s insurers
had policies requiring them “to pay on behalf of the Insured all sums which the
Insured shall become obligated to pay by reason of liability imposed by law …
for damages … because of injury to or destruction of property, including loss
of use thereof.”Relevant to the State of California decision was a trial
court ruling that each of the insurers on the risk during the period 1964 to
1976 was liable for the total amount of the State’s loss, subject to its
particular policy limits.The court
based its ruling on the “all sums” language in the policies.The trial court further held, however, that
the State could not recover insurance proceeds in each policy period, nor could
it stack policy limits across multiple periods.In other words, the trial court held that the State was confined to a
single policy period in which to recover the entire loss.On appeal, the California Court of Appeal
reversed the lower court’s ruling with respect to stacking of policy limits,
allowing the State to recover insurance proceeds in multiple policy years.

On
appeal, the Supreme Court first addressed the issue of trigger of coverage,
looking to its decisions in Montrose
Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995) and Aerojet-General Corp. v. Transport Indem. Co.,
17 Cal. 4th 38 (1997).These
decisions, noted the court, addressed issues of continuous or progressive
damage happening during several policy periods.Montrose, explained the court,
articulated the general rule that as long as there is any damage during the
policy period, i.e., an occurrence, then each insurer’s indemnity obligation
persists until the loss is complete or terminates.Aerojet,
in turn, set forth the “all sums” rule that any insurer on the risk at the time
of a continuous or progressive loss is obligated to pay the entire loss, not
just the loss limited to the insurer’s specific policy period.The State
of California court held that while these decisions arose in the context,
they also apply in the context of the insurers’ respective duties to
indemnify.In doing so, the court
rejected the insurer’s argument that they should only be responsible for the
loss that happened during their respective policy periods.The court found no justification for a pro
rata allocation methodology favored by the insurers, concluding that the phrase
“all sums” in the policies’ respective insuring agreements required the
insurers to pay all amounts for which the insured became legally liable, not
just for property damage happening during their respective policy periods.As the court stated:

We therefore conclude that the policies at issue obligate the
insurers to pay all sums for property damage attributable to the Stringfellow
site, up to their policy limits, if applicable, as long as some of the
continuous property damage occurred while each policy as “on the loss.”The coverage extends to the entirety of the
ensuing damage or injury and best reflects the insurers’ indemnity obligation
under the respective policies, the insured’s expectations, and the true
character of the damages that flow from a long-tail injury.(Internal citations omitted)

Turning
to the issue of stacking of policy limits, the court noted the potential for a
shortfall in insurance proceeds if the insured is limited to a recovering proceeds
of only a single policy period.Stacking
limits across multiple policy periods, the court observed, avoids this problem:

The all-sums-with-stacking indemnity principle properly
incorporates the Montrose continuous
injury trigger of coverage rule and the Aerojet
all sums rule, and “effectively stacks the insurance coverage from different
policy periods to form on giant ‘uber-policy’ with a coverage limit equal to
the sum of all purchased insurance policies.Instead of treating a long-tail injury as though it occurred in one
policy period, this approach treats all the triggered insurance as though it
were purchased in one policy period.

The
court further explained that:

The all-sums-with-stacking rule means that the insured has
immediate access to the insurance it purchased.It does not put the insured in the position of receiving less coverage
than it brought.It also acknowledges
the uniquely progressive nature of long-tail injuries that cause progressive
damage throughout multiple policy
periods.(Emphasis in original.)

In
reaching its holding, the court rejected disapproved the decision in FMC Corp. v. Plaisted & Companies,
61 Cal.App.4th 1132 (Cal. App. 1998) which held that stacking of
policy limits was not permitted.Thus, as
a result of the California Supreme Court’s decision, stacking of policy limits
across multiple policy periods is permissible and will be allowed absent
specific anti-stacking language within a policy, or a statute to the contrary. The court explained that such an approach is both
equitable and fulfills the insured’s reasonable expectations.The court further observed that an
all-sums-with-stacking approach “ascertains each insurer’s liability with a
comparatively uncomplicated calculation that looks at the long-tail injury as a
whole rather than artificially breaking it into distinct periods of
injury.”The court did acknowledge,
however, that insurers can avoid this allocation methodology by incorporating
specific anti-stacking provisions into their policies.